RBI Financial Stability Report: Macroeconomic vulnerabilities have abated significantly

RBI says India's stock markets have been attracting substantial foreign investments increasing the risk of reversal

* Current weak global growth outlook may prolong easy monetary policy stance in most advanced economies (AEs).

* Consequently, low risk premia may lead to accumulation of vulnerabilities, and sudden and sharp overshooting in markets cannot be ruled out.

* Against the backdrop of low interest rates in AEs, portfolio flows to emerging market and developing economies have been robust

* This increases the risk of reversals on possible adverse growth or financial market shocks, thus necessitating greater alertness.

Domestic developments

* Macroeconomic vulnerabilities have abated significantly in recent months on the back of improvement in growth outlook, fall in inflation, recovery in the external sector and political stability.

* But, growth in the banking business and activity in primary capital markets remain subdued due to moderate investment intentions.

Financial sector regulation and infrastructure

* CRAR of the scheduled commercial banks at 12.8% as of September 2014 is satisfactory

* Going forward, the public sector banks would require substantial capital to meet regulatory requirements

* Need for greater transparency in the process of carrying out a net economic value impact assessment of large Corporate Debt Restructuring (CDR) cases.

* Another aspect that impinges upon the banks' asset quality is corporate leverage and its impact on banks' balance sheets

* Indian stock markets have seen a rapid growth in recent months.

* While the retail investor base still remains comparatively low, India's stock markets have been attracting substantial amounts of foreign investments, increasing the risk of reversal.

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